An overview of the latest changes in legal acts

Amendments of the Income Tax Act and Value Added Tax Act adopted by the Riigikogu

Amendments to the Income Tax Act and the VAT Act

On 20 November 2008, the Riigikogu (Estonian Parliament) passed the Amendment Act of the Income Tax Act that will enter into force in 2009. The Act repeals the amendments adopted in spring which provided transition to a year-based corporate tax system and advance payments.

However, the provisions related to the taxation of liquidation proceeds and payments made upon a reduction in the company’s equity, redemption or return of shares will take effect. According to the amendments, a company making the above payments will become liable for tax if the payments exceed monetary and non-monetary contributions made to the company’s equity. In the future, in certain cases, a tax liability may also arise for an individual who receives the above payments.

From 2009, upon redistribution of dividends received from a subsidiary, the exemption method may be applied to holdings of 10 percent of share capital instead of the current rate of 15 percent.

Beginning from 2009, dividends paid to non-residents will be exempted from the obligation to withhold income tax irrespective of the amount of the holding. Currently, if the recipient is a non-resident legal entity and the holding does not exceed 15 percent, or if the recipient is located in a low tax rate territory, in addition to corporate tax, withholding income tax is applied. Therefore, non-resident small shareholders will benefit from the amendment.

In addition, the rate of tax withheld on royalties paid to a non-resident, payments made to a non-resident artist or sportsperson, and payments made to a non-resident for services provided in Estonia will be reduced from 15 percent to 10 percent. Tax treaties may further reduce the above rate or give the right of taxation to the state of residence of the recipient.

On 19 November 2008, the Riigikogu passed another act – the Amendment Act of the Income Tax Act, Value Added Tax (VAT) Act and State Fees Act. Although income tax rate reduction will be suspended for a year, the plan to reduce the tax rate down to 18 percent remained in force. Thus, in 2009, the income tax rate will be 21 percent; in 2010, it will be 20 percent; in 2011, the rate will be 19 percent and from 2012, the income tax rate will be reduced to 18 percent.

Similarly, increase in the basic exemption deductible from an individual’s income will be suspended for a year. In 2009, the basic tax-exempt amount of income will be 27,000 Estonian kroons. From then on, up to 2012, the amount will increase by 3,000 kroons per year. This means that from 2012, the basic tax-exempt amount of income will be 36,000 kroons.

In 2008, an additional basic exemption for child maintenance may be applied starting with the first child. According to the amendments, in 2009, the additional deduction will be applied starting with the second child, and from 2010, the above deduction will be applied starting with the first child again. Thus, when filing a tax return 2008 with the tax authorities, the additional deduction may be applied starting with the first child, but not when filing a tax return for 2009.

An increased VAT rate of 9 percent instead of the current 5 percent will be applied to books, medicinal products, periodic publications, accommodation services, and medical equipment and devices intended for the personal use of disabled persons. In addition, from 2009, instead of the current 5 percent, the VAT rate of 18 percent will be applied to handling of hazardous waste, funeral goods and services, and organising performances or concerts.

On 3 December 2008, the second reading of the draft amendment of the VAT Act and Income Tax Act (353 SE) will take place at the Riigikogu. The draft amendment stipulates an increased maximum price limit of 4,000 Estonian kroons applied to employer’s automobiles used for personal use if the personal use is not recorded. The above draft provides several amendments to the VAT Act.

New VAT return form

The Ministry of Finance has sent a new VAT return form for approval. The new form will become effective from 1 January 2009. Compared to the current form, additional informative lines have been included in the return where the cost of self-supply of goods and services taxed at the rate of 18 percent and 9 percent should be shown. In the return, the current lower VAT rate of 5 percent has been replaced by the 9 percent tax rate.

Draft amendment of the Commercial Code

The draft amendment of the Commercial Code has been sent to the third reading at the Riigikogu. The draft imposes more stringent requirements than currently applied to preparing the minutes of a shareholders’ meeting, the record of votes or the shareholders’ resolution that serves as the basis for electing a management board member. For example, a resolution about the election of a member of the management board of a private limited company should be signed either by a member of the management board entered in the commercial register or a shareholder of the company, and the signature should be notarised. As an alternative, a member of the management board entered in the commercial register or a shareholder of a private limited company may sign a petition for entering a new member of the management board into the register.

Similar requirements will be imposed on a single shareholder’s resolution that serves as the basis for the election of a supervisory board member. According to the amendment, a single shareholder’s resolution should be notarised or digitally signed by the shareholder.

The above requirements will not apply to the minutes reporting a resolution of termination of the authority or extension of the term of office of a member of the management board or supervisory board.

New possibilities in Estonian company registration portal

In the Estonian company registration portal e-äriregister, a company may now be started with a Portuguese, Lithuanian or Belgian ID-card. Finland will be added to the list of those countries in the near future. It is probably the first time when the register of one state officially accepts local ID-cards of other states and digital signatures given with those ID-cards.

Consequently, owners of ID-cards of the above countries may now start companies electronically via the company registration portal, change a company’s data in the register and submit annual reports. According to the plans, the list of activities where foreign digital signatures would be accepted will be extended in the future.

https://ettevotjaportaal.rik.ee/index.py?chlang=eng

Supreme Court decisions

The term of income tax payment

On 6 November 2008, the Administrative Law Chamber of the Supreme Court gave their judgment in case No 3-3-1-57-08. The issue of litigation was the term of income tax payment.

The litigation deals with a situation where an individual had transferred his shares of Hansapank to a company under his control; the payment for the shares had been appointed for a period further in the future. The shares had been transferred to the company at the same price as paid by Swedbank who bought the shares from the company soon afterwards.

The question was whether the aim of the transfer of shares had been to avoid and defer income tax liability arising on the sale of shares, and whether the tax authorities’ decision to apply section 84 of the Taxation Act was legitimate.

The Law Chamber decided that in order to treat the payment which the private limited company received for the sale of shares as the individual’s income, it should be proved how the payment received by the private limited company increased the individual’s assets and how that payment could be used by the individual in his own interests. Also, it should be considered whether the individual is able to change the initial agreement and whether the individual would have entered into a similar agreement with a company that is not under his control.

In addition, it should be ascertained whether the transactions had been carried out in order to evade income tax. In that case, factual matters that confirm tax evasion may become of vital issue. According to the Law Chamber, in this particular case, the judgement that evasion was the aim of the transfer may be supported by the fact that the individual had transferred the shares to the company under his control at the time when it was clear that the shares would shortly be transferred to Swedbank.

The Supreme Court sent the case back to the circuit court for a new hearing to clarify and substantiate the above issues.

Extension of a management board member’s term of office

The judgement of the Civil Chamber of the Supreme Court of 29 October 2008 in the case OÜ Rehviekspert versus Mererand (case No 3-2-1-74-08) clarifies issues related to extension under tacit agreement of a management board member’s authorities.

Legislation does not provide an automatic extension of a management board member’s right of representation upon the expiry of the date. For extending the term of office, a corresponding resolution of the shareholders of the private limited company and the management board member’s consent to the resolution are required. Consequently, the term of office of a member of the management board cannot be considered extended merely because the person continues his activities as a member of the management board.